Tag Archives: cable TV

CBS vs. Time Warner Cable: what’s at stake

September 4, 2013 By in Aereo, Cable, Entertainment, Industry Analysis, internet, Stock ideas Tags: , , , , , , , , , Leave a comment

CBS and TWC have settled their differences, but only after a month-long blackout of CBS (and Showtime) on TWC.

The dispute got ugly as time passed.  Toward the end, CBS personalities were appearing in ads offering to help TWC customers switch to other providers.  TWC was helping introduce customers to Aereo, the antenna company, as an alternate source of CBS content.  (The latter seems to me to have a strong shoot-yourself-in-the-foot aspect to it, although the networks hate/fear Aereo, so maybe it did something.)

According to SNL Kagan, the media guru that’s the source of most of the hard data in this post, in New York City, Verizon FIOS boosted its customer base by 16%+ during the struggle, presumably all coming from TWC.

The ferocity of the dispute and the length of time it took to resolve indicate the core issue–retransmission consent–is a key subject.  I think negotiations also underline the precarious position of the traditional cable content sales model.

background

Cable companies pay the traditional free over-the-air broadcasters for permission to retransmit network content to cable subscribers.  NFL football is probably the most important item, since lots of people watch.  They watch it live, too–commercials included.  For a long time, the networks regarded the fees they got as “found” money.  All they really cared about was ad revenue.

Not any more.  Over the past few years, as ad revenues have begun to wane, networks have become increasingly aggressive in pushing retransmission payments up.  In the aggregate, the ota networks will collect about $3 billion in retransmission fees in 2013.  That could balloon to $12 billion five years from now.

CBS vs. TWC

According to SNL Kagan:

–CBS had been charging  TWC $.65 – $.75 per subscriber per month for retransmission consent.  It was aiming to raise that to $2/sub/month by 2018

–the reason the previously doggy local affiliate stations are being scooped up in large numbers by predators is their share of the retransmission loot.  SNL estimates that local stations’ share of retransmission revenues has risen by 50% since 2011 and now accounts for a third of EBITDA for many of them.  The way things are going, retransmission will be the dominant source of income for them before the decade is out

—TWC was ok with $2 a subscriber/month.  Digital rights were the main sticking point.  “Digital rights” is a broad concept.  It covers on-demand rights and online rights–everything from on-demand over the internet, to ads in on-demand, to fast-forward disabling of broadcast content.  During the years when it wasn’t paying much attention, CBS had apparently granted TWC wide latitude in this area for free.  Now it wants those rights back–presumably so it can charge extra for them in later contracts with cable operators.

no one’s leaking settlement details

That suggests that one party made the lion’s share of the concessions.  My money would be on CBS having come away from the table as the big winner, if I had to make a bet.

a tipping point for cable?

As monthly cable/broadcast satellite/telco video bills approach $100 a month, subscribership is beginning to decline, albeit slowly.  Although an extra $1.50 a month doesn’t sound like much–$6 a month when multiplied to account for all the major ota networks–passing along these new costs may trigger a disproportionately large loss of subscribers.

Cable’s response?

The nuclear option, to put little ota antennas in cable boxes, is probably too expensive.  Partnership with Aereo would be iffy, given the unclear legal status of the service (a Federal court in New York has ruled in favor, one in California has ruled against).

Maybe the retransmission issue forces a rethink of cable’s whole current pricing philosophy.

 

 

 

 

 

 

4Q10 TV numbers from SNL Kagan: better than 3Q10, but not good

March 29, 2011 By in Current Market Thoughts, Entertainment, Industry Analysis, internet, Technology, Utilities Tags: , , , , , , , Leave a comment

4Q10 TV subscriber numbers

The June 2010 and September 2010 quarters were tough to take for the cable, telco and satellite TV industry, which lost a total of 335,000 net subscribers over the six months.

A complex set of interacting factors produced this result:

  1. The stock market’s biggest worry is that some—mostly younger—viewers are unplugging from traditional cable/satellite and substituting a basket of (cooler, but also cheaper) streaming services like Netflix and Hulu instead. That certainly is happening, but the extent isn’t clear.
  2. Recession has caused some viewers to cancel service to save money.
  3. For some years, cable companies have steadily been losing market share to telco-offered TV services at cheaper, introductory rates. A portion of these switchers subsequently cancel service at the end of the first year, as the telco rates revert to higher prices.
  4. Some over-the-air viewers shifted to cable/telco/satellite as the US made the switch from analog to digital TV broadcasting in the June quarter of 2009. A percentage of these viewers have figured out that they can get the reception they want (actually often a better picture) using an over-the-air digital antenna. They are switching back to over-the-air viewing as their cable/satellite contracts run out.

The December quarter was a bit better. According to industry guru SNL Kagan, cable+satellite+telco added 65,000 net new subscribers over the three months. That compares with losses of 119,000 and 216,000 subs during the prior two quarters. Two reasons for the better numbers: the economy is improving; most people who adopted cable as a temporary measure while they figured out digital have already cancelled service, so this headwind is abating.

Not everything is rosy, though. Traditional cable subscribership continues shrink at a steady, and possibly accelerating, pace. The figure of 526,000 subscribers lost during the December quarter only looks good against the much greater defections seen during the middle of the year. For 2010 as a whole, cable lost 2.2+ million subs and has dipped under 60 million viewers.

Also, according to SNL Kagan, the number of occupied housing units rose at a faster rate during the period than the number signing up for cable/satellite. In other words, a decreasing proportion of people establishing new residences signed up for these video services.

Will cable lower prices to retain customers? I doubt it. For one thing, it’s a matter of conjecture whether, say, a 10% across the board price cut would persuade anyone to stay with cable. However, such a measure would definitely mean a 10% loss of revenue—and perhaps double that percentage as a loss of profit.

Fighting the net neutrality battle is a better way to go. Ironically, it’s the cable companies’ provision of high-speed internet service that allows people to unplug from cable video offerings. If cutting prices is too risky, the logical route for the cable firms to follow to combat unplugging is to attempt to impede their streaming rivals’ access to the bandwidth they need to deliver their services, or charge them a lot for it. Streaming services, in their turn, should argue that the cable firms are quasi-monopolies who have a social obligation to allow equally high-speed access to all for a nominal fee. This battle will ultimately be decided in Washington.

My thoughts

I believe we’re only in the early adopter phase of a switch from traditional cable to streaming services. I understand that special factors may have led to large net losses of video service subscribers in the middle of last year. But I don’t take any particular encouragement from the “rebound” of the December quarter.

On the other hand, I remember thinking during the ATT breakup of the early 1980s that the regional Bells would not be able to survive for long. If someone had told me then that they would only be reaching the end of the profit road for their basic fixed-line business thirty years later, I would have thought they very crazy. Yet, the fixed-line business has fought a successful war of attrition for that long. And the Baby Bells have been done in, not by lower-cost fixed-line rivals, but by wireless, a new technological development. Although I’m inclined to look longer and harder at the streaming services providers, my guess is that value investors will find the cable firms to be fertile fields for investing for decades to come.

The June 2010 and September 2010 quarters were tough to take for the cable, telco and satellite TV industry, which lost a total of 335,000 net subscribers over the six months.

A complex set of interacting factors produced this result:

  1. The stock market’s biggest worry is that some—mostly younger—viewers are unplugging from traditional cable/satellite and substituting a basket of (cooler, but also cheaper) streaming services like Netflix and Hulu instead. That certainly is happening, but the extent isn’t clear.
  2. Recession has caused some viewers to cancel service to save money.
  3. For some years, cable companies have steadily been losing market share to telco-offered TV services at cheaper, introductory rates. A portion of these switchers subsequently cancel service at the end of the first year, as the telco rates revert to higher prices.
  4. Some over-the-air viewers shifted to cable/telco/satellite as the US made the switch from analog to digital TV broadcasting in the June quarter of 2009. A percentage of these viewers have figured out that they can get the reception they want (actually often a better picture) using an over-the-air digital antenna. They are switching back to over-the-air viewing as their cable/satellite contracts run out.

The December quarter was a bit better. According to industry guru SNL Kagan, cable+satellite+telco added 65,000 net new subscribers over the three months. That compares with losses of 119,000 and 216,000 subs during the prior two quarters. Two reasons for the better numbers: the economy is improving; most people who adopted cable as a temporary measure while they figured out digital have already cancelled service, so this headwind is abating.

Not everything is rosy, though. Traditional cable subscribership continues shrink at a steady, and possibly accelerating, pace. The figure of 526,000 subscribers lost during the December quarter only looks good against the much greater defections seen during the middle of the year. For 2010 as a whole, cable lost 2.2+ million subs and has dipped under 60 million viewers.

Also, according to SNL Kagan, the number of occupied housing units rose at a faster rate during the period than the number signing up for cable/satellite. In other words, a decreasing proportion of people establishing new residences signed up for these video services.

Will cable lower prices to retain customers? I doubt it. For one thing, it’s a matter of conjecture whether, say, a 10% across the board price cut would persuade anyone to stay with cable. However, such a measure would definitely mean a 10% loss of revenue—and perhaps double that percentage as a loss of profit.

Fighting the net neutrality battle is a better way to go. Ironically, it’s the cable companies’ provision of high-speed internet service that allows people to unplug from cable video offerings. If cutting prices is too risky, the logical route for the cable firms to follow to combat unplugging is to attempt to impede their streaming rivals’ access to the bandwidth they need to deliver their services, or charge them a lot for it. Streaming services, in their turn, should argue that the cable firms are quasi-monopolies who have social obligation to allow equally high-speed access to all for a nominal fee. This battle will ultimately be decided in Washington.

My thoughts

I believe we’re only in the early adopter phase of a switch from traditional cable to streaming services. I understand that special factors may have led to large net losses of video service subscribers in the middle of last year. But I don’t take any particular encouragement from the “rebound” of the December quarter.

On the other hand, I remember thinking during the ATT breakup of the early 1980s that the regional Bells would not be able to survive for long. If someone had told me then that they would only be reaching the end of the profit road for their basic fixed-line business thirty years later, I would have thought they very crazy. Yet, the fixed-line business has fought a successful war of attrition for that long. And the Baby Bells have been done in, not by lower-cost fixed-line rivals, but by wireless, a new technological development. Although I’m inclined to look longer and harder at the streaming services providers, my guess is that value investors will find the cable firms to be fertile fields for investing for decades to come.

3Q10 SNL Kagan numbers: pay TV declines again in the US

November 19, 2010 By in Capital-intensive firms, Current Market Thoughts, Entertainment, Industry Analysis, Technology Tags: , , , Leave a comment

the pay TV industry

The pay TV business in the US has three parts:  cable TV, satellite TV and telecom TV.

cable maturing

Traditional cable TV subscriber numbers peaked in 2001, when the country had 52.4 million basic cable only households and 14.5 million with digital, for a total of 66.9 million.

The overall figure dropped by 800,000 in the recession year of 2002, although the decline was masked in industry revenues by 4.8 million households upgrading to higher-cost digital.  Aggregate subscriber numbers declined from that point, but only by a total of about 1% through 2006 (700,000 households lost over four years).  But any revenue decline from this source was trivial compared with the gains from rapid adoption of digital.  In 2007, however, the combination of aggressive marketing of telecom offerings and economic weakness sparked a sharper rate of subscriber loss.

Overall cable figures, from industry expert SNL Kagan, break out as follows:

2001     66.9 million total subscribers     14.5 million digital, 52.4 million basic only

2006     65.4 million total subscribers     32.6 million digital, 32.8 million basic only

2009     62.1 million total subscribers     42.6 million digital, 19.9 million basic only.

satellite and telecom providers gaining subscribers

Even in 2009, total pay TV industry subscriber numbers rose.  Traditional cable losses of 1.6 million household were more than offset by:

–satellite broadcasters, who added 1.4 million subscribes to end the year at 32.7 million, and

–telecom providers, who added 2.1 million subscribers to end the year at 5.1 million.

a big change over the past six months

Even through the dog days of 2007-2008, the pay TV industry steadily added subscribers, though at a relatively slow rate.  Within the industry, traditional cable steadily lost small numbers of subscribers to satellite and telecom.

In the June quarter of 2010, however, the US pay TV industry lost subscribers for the first time ever. Same intra-industry dynamic as before–cable lost a stunning 711,000 subscribers; satellite added 81,000 and telecom signed up an extra 414,000.  The net industry loss:  216,000 customers. SNL Kagan attributed the cable losses to the economy–high unemployment and the weak housing market.

In the September quarter, whose figures were just released, the story was the same:

— a net loss, the second ever, of 119,000 customers, and

–cable lost 741,000 customers, its worst performance ever; satellite added 145,000 subscribers, telecom 476,000.

SNL Kagan points out that this is normally the seasonal peak for subscriber additions, so what’s going on with cable can’t simply be the economy.

what’s going on?

I think three factors are involved:

1. The continuing sub-par economy is probably the trigger for consumers’ rethinking their spending priorities.   It is a bit unusual, though, that the rethink is coming with such a lag.

2.  Cable has raised its prices to a level that it is providing a pricing umbrella that made the financial decision to enter the pay TV industry easier for telecom companies.  This will likely prove a horrible strategic mistake in a capital-intensive industry.  Even if the telcos eventually conclude they can’t be profitable, they will turn their attention to recovering as much of their invested capital as they can.  In other words, the billions they’ve spent on TV means they can’t simply exit the industry.  So they won’t stop discounting.

3.  New, cheaper forms of entertainment distribution have emerged.  Netflix and Hulu, together costing about $20 a month, are leading examples.  Ironically, both require the high-speed internet that cable delivers.  But they’re the iTunes store to cable’s CD albums.  They’re cheaper; they’re more flexible; and they offer on-demand service.  In addition, buying a $15 cable will allow you to display streaming content on your wide-screen TV.  Newer TV models connect directly to the internet.

More confirming evidence:  look at the resistance cable companies have put up to broadcast networks’ demands for higher retransmission fees; look at the more basic “basic” services cable companies are offering.  Time Warner, for example, is offering basic for the first time without ESPN, to lower the cost.

my thoughts

Cable is in trouble on two fronts.  One is from a kind of “creative destruction,” the emergence of competing technology that’s newer, better, cheaper.  In this regard, it’s somewhat like the music companies were ten years or more ago.  The second is a more traditional kind.  Faced with competition, cable ceded the low-end market to the telcos and preserved profits by moving up-market.  That strategy–the same one GM used when faced with Japanese competition–has backfired.